Going back to university can make sound financial sense for investor landlords, says Sevi Rixson, managing principal of investment and property management specialist Urban Student
The quality of most student accommodation in our university towns has changed dramatically over the past couple of decades from ‘basic’ halls of residence and private ‘digs’ into exceptionally well appointed Houses in Multiple Occupation (HMOs), infact very similar to the Downing Student in Leeds accomadations all with the latest vogue being for chic ‘pods’ offering on-suite facilities and integrated technology. I’d like to explain why independent financial advisors should take another look at investing in the sector, and learn how their clients can become ‘armchair’ landlords.
Last September, with the government raising the cap on UK student numbers, the first year intake exceeded 500,000 for the first time – resulting in a record 2.3+ million students descending on university towns, and creating increased pressure for both places and indeed beds. In some instances students were reportedly having to share accommodation originally designed for single occupancy, while others were put up in local B&Bs and hotels or had to trek in from up to 40 miles away.
Next September, student number controls are being removed altogether – thus placing a further squeeze on student accommodation in many university towns, and making this an ideal time to make a sound financial investment in the UK student property sector
Top flight universities (and there are a number of ranking tables available) are constantly striving to attract even more students by providing the best education facilities or at a minimum retain their blue ribbon status. And the introduction of tuition fees pales into irrelevance when looking at the total number of students wanting to attend UK universities each year.
Almost all courses are in demand, with many being oversubscribed. And, while domestic student numbers are fluctuating, any dip is more than offset by the growth in students coming from overseas. Indeed UCAS applications have gone up year on year, and many universities now typically have 30% or more overseas students attending full time courses – number which continues to grow.
To meet this increased demand for places, a number of universities have had to extend their provision of student accommodation by refurbishing existing halls of residence or by building new ones. Large property developers have also joined the band wagon and stepped in to build and operate new multi-bed facilities.
These purpose-built student studio complexes deliver great accommodation and are ideally suited to institutional investors or education providers that take a long term investment view – particularly as they retain overall control, have direct access to new student tenants, and can control both the rents and maintenance charges.
The Problem With Pod Systems
“In recent years some developers have marketed individual rooms in these ‘fully managed, boutique pod’ schemes to potential investors, enticing them with seemingly good levels of return. However, issues are increasingly being identified with this approach, to the detriment of the investor – not least, that the promised levels of return are falling well short. Investors are also experiencing difficulties in divesting themselves of the investment, as they don’t actually own any property and as there is no real mechanism to transact a resale.”
That said, there is still significant demand for student accommodation, and a large percentage is being supplied by independent landlords who are increasingly being asked to take up more of the shortfall. Buy-for-rent property has long been regarded as a good investment, and the student property sector in particular, as each year new tenants come forward seeking accommodation. With the upcoming changes in pension rules, high yield property is also being seen as by many clients and IFAs alike as a more attractive option to more traditional annuities as it remains an asset and can be passed on to subsequent generations.
But so many landlords still get it wrong. They fail to maximise their return on investment and provide inferior property, which in turn results in constant maintenance issues. And it’s also typically been extremely hands-on in terms of property identification, renovation and management. This has meant that IFAs have found it somewhat difficult to recommend property as an investment option if their clients simply want to sit back and reap the returns without having to oversee the process – that is until now.
The FCIPI Alternative
It is now possible to become an ‘armchair’ investor in property and access the returns provided by the much loved freehold multi-let student house. Fully Completed Income Producing Investment (FCIPI) schemes are emerging from providers like Urban Student.
Using their market knowledge, regulatory and management expertise and buying power, these schemes identify and acquire individual properties in lucrative university locations. These are then packaged up as stable investment opportunities that deliver great annual yield returns and long term asset value growth and market them to potential investors.
Typically, FCIPI scheme providers initially manage all aspects of the property purchase, including legal compliance to requirements like the HMO licensing. They then take on the redevelopment and the provision of the necessary mix of technology, personal and shared facilities.
The scheme providers even take on the letting and ongoing management process – often having new tenants in place long before the property ever becomes vacant, and thereby maximising occupancy. This means that investors can benefit from a strong income from day one; don’t have to be hands on; have direct freehold ownership; and can resell the property through the age old channels should they ever wish to take it out of their investment portfolio.
A Sample Calculation
Take a typical six-bedroom property developed for student occupation in a popular university town, with each student paying £100 a week in rent (although some students pay £300-£400 a week in the ‘smarter’ parts of major cities like London – although, of course, the property value is also proportionately higher). Then deduct 25% for overall operational costs including utilities, and you arrive at a net annual operating income of £23,400.
That equates to an annual 8% yield based on a property valued at £292,000 – and the property would typically have a conservative vacant possession value no lower than £265,000. This means that the investor already has more value in the property from the outset. Then factor in property appreciation, which in some areas has been over 20+% on the past year. But even at a more conservative rate, it still means that the bricks and mortar are worth more.
Repurposing Existing Properties
Even redundant commercial properties are now being professionally redeveloped under Permitted Development to satisfy demand for student property. Changing B1 Office into C3 Residential typically doesn’t require planning permission, but it needs to be implemented ahead of the current May 2016 deadline.
In a recent scheme, two redundant floors of storage space above a high street store were converted into nine studios. These were all let off plan in advance of the renovation work even being started and almost four months ahead of the new term starting. This gave the eventual investor certainty of income and the students got great, purpose designed and affordable accommodation.
“Property remains a good investment, and IFAs can now include this option in their recommended portfolios,” Rixson concludes. “Going the FCIPI route opens up student property investment to many more individuals; bringing more quality property onto the market with a long term high yield revenue stream and a solid level of property appreciation tied in for good measure.”
To summarise: As more students decide to study in the UK, the demand for quality accommodation is driving up returns in many areas – with gross rental receipts having increasing by as much as 11%, over the past 12 months. And, because supply in popular university towns remains structurally limited, this leads to a feverish lettings period each year – making going back to university a sound financial option.
For further information visit www.UrbanStudent.co.uk or email info@UrbanStudent.co.uk